Equities are pieces of a company, also known as "stocks or shares". When you buy shares of a company, you're basically purchasing an ownership interest in that company. A company's stockholders or shareholders all have equity in the company, or own a fractional portion of the whole company. They buy the shares because they expect to profit when the company profits. Companies issue two basic types of shares: equity and preference shares.

A. Equity SharesBoth public and private corporations can issue common shares. Equity shareholders are the owners of a company and initially provide the equity capital to start the business.

Equity share ownership in a public company offers many benefits to investors. The following are some of its main advantages:

There are also a few drawbacks to owning equity shares. Although part owner of the business, common shareholders are in a relatively weak position, as senior creditors, bond holders and preferred shareholders all have prior claims on the earnings and assets of a company. While interest payments are guaranteed to bond holders, dividends are payable to shareholders at the discretion of the directors of a company.

B. Preference Shares

Preference shares is a class of share capital that generally entitles shareholders to fixed dividends ahead of the company's common shares and to a stated rupee value per share in the event of liquidation. Typically, the preferred shareholder occupies a position between that of a company's creditors and its common shareholders.
As preferred shares have characteristics of both debt and equity, they provide a link between the bond and common equity sections of a portfolio. One shortcoming of preferred shares is that many are non-voting. However, after a specified number of preferred dividends are withheld, voting rights are usually assigned to preferred shareholders.

Why invest in equities?

Investing in equities/shares offers many benefits over other asset classes like a high level of liquidity which unlike property, gives you ready access to your money. There are more than 6000 companies listed on the stock market in which you can buy shares so there are plenty to choose from to match your investment needs. Other benefits include:

Returns: Stocks can help you build long-term growth into your overall financial plan. Over the longer term, shares can produce significant capital gains through increases in share prices. Some companies also issue free or bonus shares to their shareholders as another way of passing on company profits or increases in their net worth. History has repeatedly demonstrated that stocks, as an asset class, have outperformed every other type of investment over long periods of time.

(Data Source: RBI handbook of Statistics, NCDEX)

In addition, stocks pay dividend income, which has the potential to grow over time. Shares that pay regular dividends are called income stocks. These companies have capital appreciation potential and when dividends are reinvested into additional shares, there is also the potential to compound investment returns.

Ownership: Stock represents an ownership or equity stake in a corporation. If you are a stockholder, you own a proportionate share in the corporation’s assets. That means you gain part of the ownership of the company.

Tax Benefits: Investment in shares reaps great tax benefits. The dividend income generated on shares is completely tax-free. Long-term capital gains arising on equity investment is not taxed by the government. That means, if you invest in a company and keep the shares for 12 months, you don’t need to pay any tax on income you earn on selling the shares after 12 months. Short term capital gains tax on shares is also just 10%, while investment in other asset classes attracts short-term capital gains tax of 30%.

Control over your financial future: You can decide exactly how your money is invested, enabling you to have a lot of control over your finances.

What are the frequently used terms when investing in equities?

Bid: This represents the highest price a prospective buyer is willing to pay for a security.

Offer (Ask): This represents the lowest price a prospective seller is willing to accept for a security.

Market Order: An order to buy or sell a specified number of shares at the best available price at the time the order is received on the exchange floor. All orders not bearing a specific price are usually considered "at the market" which could mean paying the "offer" when buying or accepting the "bid" when selling.

Limit Order: An order for which you request a specific price at which the transaction may be executed.

Stop Buy and Stop Loss Orders: Orders to buy or sell that are placed above or below the current market price, which become active orders when the price of a board lot rises or falls to the specified price. These orders may be placed to execute at the market, at a specified limit or within a specified price range. A stop buy order can be used to protect against losses in a short sale, whereas a stop loss order can be used to protect a paper profit or to limit a possible loss when you already own the shares. Not all stock exchanges will accept these orders. Stop buy and stop loss orders are risky because they may not necessarily fill at the specified price but at the best possible price available at that time.

What is an Offer Document:

Offer document means prospectus in case of a public issue, which is filled with Registrar of companies (ROC) and stock exchanges. The offer document contains all relevant details pertaining to the issue upon which the investors can make his/her decision.

Draft Offer Document: means the offer document in the draft stage, which is filed with SEBI for its observations. The draft offer documents are filed with SEBI at least 21 days prior to filing the offer document with ROC and Exchange.

SEBI’s Role:Any company making a public issue or a listed company making a rights issue of value more than Rs.50 Lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after receiving observations from SEBI. The validity of SEBI observation is 3 months only i.e the company has to open its issue within 3 months period.

What do you mean by Cut off PriceIn case of public issues the actual discovered price/ issue price can be anything between a given price band. The discovered issue price is called the cut off price.

What are the Basis of Allotment:The allotment in case of QIB category is on a discretionary basis while in case of Retail and Non-QIB (HNI) category the allotment is on a proportionate basis.

What is Stop Buy and Stop Loss Orders?

Orders to buy or sell that are placed above or below the current market price, which become active orders when the price of a board lot rises or falls to the specified price. These orders may be placed to execute at the market, at a specified limit or within a specified price range. A stop buy order can be used to protect against losses in a short sale, whereas a stop loss order can be used to protect a paper profit or to limit a possible loss when you already own the shares. Not all stock exchanges will accept these orders. Stop buys and stop loss orders are risky because they may not necessarily fill at the specified price but at the best possible price available at that time.

Market Order:An order to buy or sell a specified number of shares at the best available price at the time the order is received on the exchange floor. All orders not bearing a specific price are usually considered "at the market" which could mean paying the "offer" when buying or accepting the "bid" when selling.

What are the various membership categories in the equity derivatives market?

The various types of membership in the derivatives market are as follows:

Trading Member (TM) – A TM is a member of the derivatives exchange and can trade on his own behalf and on behalf of his clients.

Clearing Member (CM) –These members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them.

Self-clearing Member (SCM) – A SCM are those clearing members who can clear and settle their own trades only.

What are requirements for a Member with regard to the conduct of his business?

The derivatives member is required to adhere to the code of conduct specified under the SEBI Broker Sub-Broker regulations. The following conditions stipulations have been laid by SEBI on the regulation of sales practices:

Sales Personnel : The derivatives exchange recognizes the persons recommended by the Trading Member and only such persons are authorized to act as sales personnel of the TM. These persons who represent the TM are known as Authorized Persons.

Know-your-client : The member is required to get the Know-your-client form filled by every one of client.

Risk disclosure document : The derivatives member must educate his client on the risks of derivatives by providing a copy of the Risk disclosure document to the client.

Member-client agreement : The Member is also required to enter into the Member-client agreement with all his clients.

What is the lot size of contract in the equity derivatives market?

Lot size refers to number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

What is the margining system in the equity derivatives market?

Two type of margins have been specified -

Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which depends on the time in which Mark to Market margin is collected.

Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted against the available Liquid Net worth for option positions.

What are the exposure limits in equity derivatives market?

It has been prescribed that the notional value of gross open positions at any point in time in the case of Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 (thirty three one by three) times the available liquid net worth of a member, and in the case of Stock Option and Stock Futures Contracts, the exposure limit shall be higher of 5% or 1.5 sigma of the notional value of gross open position

What are the requirements for a FII and its sub-account to invest in equity derivatives market?

A SEBI registered FIIs and its sub-account are required to pay initial margins, exposure margins and mark to market settlements in the derivatives market as required by any other investor. Further, the FII and its sub-account are also subject to position limits for trading in derivative contracts. The FII and sub-account position limits for the various derivative products are as under:

Index Options

Index Futures

Stock Options

Single stock Futures

FII Level

Rs. 250crores or 15% of the OI in Index options, whichever is higher.

In addition, hedge positions are permitted.

Rs. 250crores or 15% of the OI in Index futures, whichever is higher.

In addition, hedge positions are permitted.

20% of Market Wide Limit subject to a ceiling of Rs. 50crores.

20% of Market Wide Limit subject to a ceiling of Rs. 50crores.

Sub-account level

Disclosure requirement for any person or persons acting in concert holding 15% or more of the open interest of all derivative contracts on a particular underlying index

Disclosure requirement for any person or persons acting in concert holding 15% or more of the open interest of all derivative contracts on a particular underlying index

1% of free float market capitalization or 5% of open interest on a particular underlying whichever is higher

1% of free float market capitalization or 5% of open interest on a particular underlying whichever is higher

What are the requirements for a NRI to invest in equity derivatives market?

NRIs are permitted in invest in exchange traded derivative contracts subject to the margin and other requirements which are in place for other investors. In addition, a NRI is subject to the following position limits:

Index Options

Index Futures

Stock Options

Single stock Futures

NRIlevel

Disclosure requirement for any person or persons acting in concert holding 15% or more of the open interest of all derivative contracts on a particular underlying index

Disclosure requirement for any person or persons acting in concert holding 15% or more of the open interest of all derivative contracts on a particular underlying index

1% of free float market capitalization or 5% of open interest on a particular underlying whichever is higher

1% of free float market capitalization or 5% of open interest on a particular underlying whichever is higher

What are the basis o financial instruments?

Financial instruments can be thought of as easily tradable packages of capital, each having their own unique characteristics and structure. The wide array of financial instruments in today's marketplace allows for the efficient flow of capital amongst the world's investors.

Equities

Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues.

Mutual funds

A mutual fund allows a group of people to pool their money together and have it professionally managed, in keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency, risk-diversification, professional management and sound regulation.

Bonds Bonds

are fixed income instruments which are issued for the purpose of raising capital. Both private entities, such as companies, financial institutions, and the central or state government and other government institutions use this instrument as a means of garnering funds. Bonds issued by the Government carry the lowest level of risk but could deliver fair returns.

Deposits

Investing in bank or post-office deposits is a very common way of securing surplus funds. These instruments are at the low end of the risk-return spectrum.

With the ever-increasing cost of land, real estate has come up as a profitable investment proposition.

Gold

The 'yellow metal' is a preferred investment option, particularly when markets are volatile. Today, beyond physical gold, a number of products which derive their value from the price of gold are available for investment. These include gold futures and gold exchange traded funds.

What are Primary and Secondary Markets?

Primary Market
An Issuer/Company enters the Primary markets to raise capital. They issues new securities in Exchange for cash from an investor (buyer). If the Issuer is selling securities for the first time, these are referred to as Initial Public Offers (IPO's). Summing up, Primary Market is the means by which companies float shares to the general public in an Initial Public Offering to raise capital.
E.g. If the promoters of a private company, say XYZ makes its shares available to investors, company XYZ is said to have entered the primary market.

Secondary Markets
Once new securities have been sold in the Primary Market, an efficient mechanism must exist for their resale, if investors are to view securities as attractive opportunities. Secondary Market transactions are referred to those transactions where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The Secondary Market or the Stock Exchanges are regulated by the regulatory authority. In India, the Secondary and Primary Markets are governed by the Security and Exchange Board of India (SEBI).
For eg. If one of the investors who had invested in the shares of company XYZ sold it to another at an agreed upon price, a Secondary Market transaction is said to have taken place. Normally investors transact in securities using an intermediary such as a broker who facilitates the process

What re the basic objectives designed by Sebi ?

The basic objectives of the Board were identified as:

To protect the interests of investors in securities

To promote the development of Securities Market

To regulate the Securities Market

SEBI has contributed to the improvement of the Securities Market by introducing measures like capitalization requirements, margining and establishment of clearing corporations that reduced the risk of credit
Today, the board continues on its two-fold mission of integrating the Securities Market at the National level and also diversifying the trading products to increase the number of traders (including banks, financial institutions, insurance companies, Mutual Funds, primary dealers etc) transacting through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD has been a real landmark.

What are Stock Exchanges?

A Stock Exchange is a place that provides facilities to stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus it is the meeting place of the stock buyers and sellers. India's premier Stock Exchanges are the Bombay Stock Exchange and the National Stock Exchange.

What are the various types of the risks once I start trading?

Market Risk
This is the risk of investing in the stock market in general. It refers to a chance that a securities value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are affecting by market risk.

Industry Risk
This is risk that affects all companies in a certain industry. For eg. Utility companies, are often viewed as relatively low in risk because the utility industry is stable and operates in a predictable environment with relatively little change. In contrast, internet and other technology industries are usually viewed as high in risk because the industry is changing so quickly and unpredictably. The dotcom bubble burst in the 90s affected the valuation of all stocks in that industry.All stocks within an industry are subject to industry risk.

Regulatory Risk
virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations, which will dramatically affect a business.

Business Risk
These are the risks unique to an individual company. It refers to the uncertainty regarding the organizations ability to perform business or provide service Products, strategies, management, labor force, market share, etc., which are among the key factors investors consider in evaluating the value of a specific company.

What is Insider Trading?

In your dealings with the stock world, you will often come across the term 'insider trading'. In simple words, the meaning of insider trading is 'the trading of shares based on knowledge not available to the rest of the world.
Insider trading has 2 connotations.
Corporate personnel of a company buying and selling stock in their own company. When corporate insiders trade in their own securities, they must report their trades to the exchange. Illegal insider trading refers to buying or selling a security after receiving 'tips' of confidential securities information. Thus it is considered as a breach of confidence while in possession of non-public information about the company.

Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

Government employees who learned of such information because of their employment by the government; and

Other persons who misappropriated, and took advantage of, confidential information from their employers

What is margin trading?

Margin trading is trading with borrowed funds/securities. It is almost like buying securities on credit.
Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities it also subjects you to a number of unique risks such as interest payments charged for the borrowed money.Kotaksecurities.com offers its customers the facility of Margin trading.

What is rolling settlement?

The process of settling security trades on successive dates so that trades executed today will have a settlement date one business day later than trades executed yesterday. This contrasts with account settlement, in which all trades are settled once in a set period of days, regardless of when the trade took place.
Securities that are sold in the secondary market typically settle three business days after the initial trade date. Within a portfolio, if some stocks are sold on Wednesday, they will settle the following Monday. Stocks in that same portfolio that are sold on Thursday will settle on the following Tuesday. Finally, if some of the stocks are sold on Friday, they will settle the following Wednesday. When securities are sold and settled on successive business days, they are said to be experiencing a rolling settlement.

How can you qualify the market as bull or bear?

Bull and Bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements, lasting days, as they may only indicate corrections or short-lived movements.

What drives bull and bear markets?

The uses of "Bull" and "bear" to describe markets have been derived from the manner in which each of these animals attacks its opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a Bull market. And if the trend is down, it is considered a Bear market.

The supply and demand for securities largely determine whether the market is in the Bull or Bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These combine to make investors bid higher or lower prices for stocks.

MARKET CAPITALIZATION

"Cap" is short for capitalization, the market value of a stock, indicating the size of the stock available.Calculating a stock's capitalization
Market Capitalization = Market Price of the stock x the number of the stock's outstanding* shares
*Outstanding means the shares held by the public.

SMALL-CAP STOCKS: The stocks of small companies that have the potential to grow rapidly are classified as small-cap stocks. These stocks are the best option for an investor who wishes to generate significant gains in the long run; as long he does not require current dividends and can withstand price volatility. Generally companies that have a market Capitalization in the range of up to 250 Crores are small cap stocks.

MID-CAP STOCKS: Mid-cap stocks are typically stocks of medium-sized companies. These are stocks of well-known companies, recognized as seasoned players in the market. They offer you the twin advantages of acquiring stocks with good growth potential as well as the stability of a larger company. Generally companies that have a market Capitalization in the range of 250-4000 crores are mid cap stocks

LARGE-CAP STOCKS: Stocks of the largest companies (many being blue chip firms) in the market such as Tata, Reliance, ICICI are classified as large-cap stocks. Being established enterprises, they have at their disposal large reserves of cash to exploit new business opportunities

The sheer volume of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them over time. Investors, however gain the advantages of reaping relatively higher dividends compared to small- and mid-cap stocks while also ensuring the long-term preservation of their capital.

What are Circuit filters & trading bands?

In order to check the volatility of shares, SEBI has come up with the concept of Circuit Filters. Under this, Sebi has specified the fixed price bands for different securities within which they can move on a given day.
Recently, in a bid to check the rampant price manipulation in small-cap stocks (known as penny stocks), stock exchanges reduced the circuit filter maximum permissible rise in prices in a day to 5 per cent. Earlier, stocks were allowed to rise up to 20 per cent in a session.
The NSE has also reduced the circuit filter in all the stocks, which are traded on a trade-to-trade basis to 5 per cent. As the closing price on BSE and NSE can be significantly different, this means that the circuit limits for a share on BSE and NSE can be different.

What are the instruments traded in the stock markets?

There are various types of instruments in the stock market. They include Shares, Mutual Funds, IPO's, Futures and Options.

Why would I choose stocks?
Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.

What is a Market Order?
A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.

What is a Limit Order?
To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the Current Market Price. However, a limit order guarantees a price but cannot guarantee execution of the trade, because the scrip might not reach the desired price on that particular trading day owing to Market related factors.

A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.

What is a Stop Loss Order?
A stop loss order is a Normal order placed with a broker to sell a security when it reaches a certain predetermined price Trigger Price. Sometimes the market movements defy your expectations. Such market reversals often result in loss bearing transactions. The stop loss trigger price is your defense mechanism- an amount at which you will be able to sustain yourself against such unanticipated market movements. Your stop loss instruction is an order to sell when the price of contracts reaches a pre-determined level - the trigger price. Naturally, this price cannot be more than the price of the stock you are trading.

What tools are used for stock analysis and forecasting?

The behavior of the price movement of a stock is said to predict its future movement. One such approach is called technical analysis and is based on the historical movements of the individual stocks as well as the indices. Their belief is that by plotting the price movements over time, they can discern certain patterns which will help them to predict the future price movements of the stocks. On the other hand we have "fundamental analysis", where the forecasting is done on the basis of economic, industry and company data. Technical analysis is used more as a supplement to fundamental analysis rather than in isolation.

What are equity markets?

These are markets for financial assets that have long or indefinite maturity i.e., stocks. Typically such markets have two segments—primary and secondary markets. New issues are floated in the primary market and outstanding issues are traded in the secondary market (i.e., the various stock exchanges).

There are 3 ways a company can raise capital in the primary market:

Public Issue: Sale of fresh securities to the public.

Rights Issue: This is a method of raising capital existing shareholders by offering additional securities to them on a pre-emptive basis.

Private Placement: Issuers make direct sales to investor groups (i.e., there is no public issue.)

What is Dematerialization?

Dematerialization is the process by which physical share certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor’s account with its DP. In order to dematerialize certificates; an investor will have to first open an account with a DP and then request for the dematerialization of certificates by filling up a dematerialization request form [DRF], which is available with the DP and submitting the same along with the physical certificates. The investor has to ensure that before the certificates are handed over to the DP for Demat, they are defaced by marking “Surrendered for Dematerialization” on the face of the certificates.

How to choose a DP?

NSDL provides its services to investors through its agents called depository participants (DPs). These agents are appointed by NSDL with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities i.e. Banks, Financial Institutions and Members of Stock Exchanges (brokers)registered with SEBI can become DPs.

Selecting a DP

You can select your DP to open a Demat account just like you select a bank for opening a savings account. Some of the important factors for selection of a DP can be:

Convenience - Proximity to your office/residence, business hours.

Comfort - Reputation of the DP, past association with the organization, whether the DP is in a position to give the specific service you may need?

Cost - The service charges levied by DP and the service standards.

What are the benefits of participation in a depository?

NSDL provides its services to investors through its agents called depository participants (DPs). These agents are appointed by NSDL with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities i.e. Banks, Financial Institutions and Members of Stock Exchanges (brokers)registered with SEBI can become DPs.

Selecting a DP

You can select your DP to open a Demat account just like you select a bank for opening a savings account. Some of the important factors for selection of a DP can be:

"KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary."

Attention Investors:

"Prevent Unauthorised transactions in your account --> Update your mobile numbers/email IDs with your Stock Brokers. Receive information of your transactions directly from Exchange on your mobile/email at the end of the day .......... Issued in the interest of investors"

"Prevent Unauthorized Transactions in your demat account --> Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from NSDL/CDSL on the same day......................issued in the interest of investors."

"No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account."